Tort Reform? It’s Government Interference in Marketplace

How’s this for “industrial policy”? Consider an extremely well-educated, value-added, white-collar work force whose skills and savvy are the envy of the industrialized world. This multibillion-dollar knowledge industry has global reach and influence. America is the undisputed leader in this vital competitive arena, and other countries increasingly look to the United States for both inspiration and imitation. Just ask China, Japan and the emerging-market economies of Eastern Europe.

However, the federal government now believes this particular knowledge industry has become far too powerful. So it proposes bold new laws designed to dramatically scale back the industry’s wages, create barriers of entry to access by potentially profitable customers--including, incidentally, society’s poorest and most disadvantaged--and cripples their ability to negotiate on their customers’ behalf.

Now, you may agree or disagree on the merits of the proposed laws, but there should be no doubt that this is “industrial policy” in its purest and rawest form. Washington is using its vast powers to explicitly pick winners and losers in the marketplace. The government is, in effect, trying to pass laws that declare one set of highly educated knowledge workers more valuable to the economy than another. So much for market forces.

This is, of course, a somewhat cynical way to interpret the current congressional efforts to radically reform the legal system--notably in the controversial realms of tort, or liability law, and securities law. But by any fair measure, lawyers do qualify as knowledge workers--certainly as much as software designers, aerospace engineers and molecular biologists. It is also undeniably true that American tort and securities law influences how other countries design their legal systems. For decades, America’s legal industry has been a clear winner in the global economic marketplace. What we have pending is an industrial policy initiative explicitly designed to undermine the global competitiveness of the legal industry.

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The purpose here is emphatically not to defend America’s lawyers. For one, they are quite capable of taking care of themselves. For another, there are excellent reasons why revamping the civil legal system has attracted such popular political support--we all know the lawyer jokes.

Too many members of the bar richly deserve contempt for bringing lawsuits that are frivolous and seeking damages that are disproportionate to the harms. However, today’s push to transform tort and securities laws reveal an awful lot about the ideological inconsistencies and slippery pseudo-arguments about government’s role in the marketplace.

On one hand, federal programs intended to facilitate defense conversion, such as the Technology Reinvestment Program, and high-tech initiatives, such as the Commerce Department’s Advanced Technology Program, are derided as the worst sort of government interference, arbitrary subsidies for favored companies and technologies.

On the other, reforming tort law in ways that insulate companies from punitive damages and changing securities laws to shield companies from shareholder suits prompted by misleading disclosures is heralded as positive government involvement. One is harshly dismissed as “industrial policy,” the other is lovingly embraced as essential to U.S. competitiveness in global markets.

Excuse me, but isn’t this a distinction without a difference? Putting a hard cap on product liability damages for, say, a semiconductor company or an automobile giant is just as much a financial subsidy as sending a government check for research in molecular beam epitaxy or catalytic converters.

All of us end up paying for both; it’s just that the direct government subsidies are more cleanly identified. How can anyone argue that limiting liability is not a form of subsidy? When the government directly intervenes to change the legal risk-reward ratios that industry considers before designing, building and shipping a product--or making a public offering in the securities markets--it is not merely being “pro-business,” it is penalizing some industries at the expense of others.

What’s so remarkable about these proposed legal reforms, though, is how enthusiastically high-tech businesses support them versus the explicit subsidies of the TRP, ATP and other federal programs. While the Clinton Administration’s high-tech programs have received only lukewarm support in the face of congressional dismemberment, tort and securities reform inspires passionate endorsement.

But then consider the business choices: If you’re a newly public Silicon Valley company, would you rather get a $500,000 subsidy from the government with compliance strings attached, or would you rather be effectively freed from the specter of a shareholders’ suit? Would you rather have your research co-funded by a National Lab, or would you prefer to have your liability on a poorly designed product capped?

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Quite clearly, the high-tech business community is voting with its lobbyists to say that reducing legal exposure is more important to its competitiveness than getting direct cash subsidy and support for its research and development. That is a sad comment on both the quality of American research and development and the American legal system.

Ironically, at the same time companies want tort and securities laws weakened, they want intellectual property laws toughened. Patent and copyright lawyers are better for the economy than product liability lawyers, no?

The current battle over legal reform is precisely the same in principle as the battle over the ATP, TRP and other government-funded initiatives. It’s all “industrial policy.” It’s all government efforts to help pick winners and losers in the marketplace. What we’re watching on Capitol Hill and the White House is therefore not a battle over the ideology of economic competitiveness--it is a power play, pure and simple.

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Michael Schrage is a writer, consultant and research associate at the Massachusetts Institute of Technology. He writes this column independently for The Times. He can be reached at schrage@latimes.com by electronic mail via the Internet.